You who philosophize disgrace…
There’s plenty being said at the moment all over the media about the demise of final salary (or defined benefit) schemes in the private sector in the UK. As things stand today nearly three quarters of the 8,490 private sector final salary schemes we have are already closed to new entrants. According to a report just published by the National Association of Pension Funds (the NAPF) a quarter of the schemes may close to existing members too in the next few years.
This is apparently only going one way; the ultimate closure of the so-called gold-standard workplace pension schemes in this country; in the private sector at least. Closing to new entrants is just the first stage in this process. Expect to hear of this scheme or that scheme increasing employee contributions, reducing scheme accrual rates, removing or trimming the rate of pension escalation etc. etc. and even, finally, closing to existing members as time goes on. As I say, it’s a process; and probably unstoppable.
It’s caused a big media fuss and everything which goes along the lines of “our final-salary pensions need to be saved!” and that sort of thing. The uproar is that as defined benefit schemes are gradually being closed down they are being replaced by defined contribution schemes. Defined contribution schemes are demonised in the process – they’re inferior to defined benefit schemes what with all the risks being lumped on employees rather than employers and that’s not fair. You’ve read the articles.
Well I don’t go along with the demonization of defined contribution schemes. Both DB and DC schemes have their benefits and they both have their drawbacks too. Many employees are happier with DC schemes even though they may be bearing the investment and mortality risks; for some such risks are balanced by the personal ownership and control over their pension assets that doesn’t come with a defined benefit scheme. If we ever reach a more enlightened age where people may be given similar control over their pension assets when they actually reach old age (so that they can use their own savings in ways that suit them as individuals), then so much the better.
But there is a big difference between DB schemes and DC schemes in this country of ours and it’s more than simply the type of scheme or the way the risks are skewed between employers and employees. The big difference is the amount of money employers are prepared to pay into the two different forms of workplace pension scheme. By and large the amount of money paid into DC schemes by employers is much lower than the amount paid into DB schemes. To me, that’s what makes DC schemes inferior and it’s that that all the fuss should be being made about…
28 January 2009
www.napf.co.uk – Pension Provision and the Economic Crisis, January 2009
The Guardian 23 January 2009.
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